Soon after taking the helm in January 1991 of the Hong Kong
developer his late father founded 30 years earlier and against
the wishes of a reluctant executive team, Chan began plans to
build shopping malls in China, anticipating an economic boom.
This year, the opening of its fourth mall in the nation may
propel the company’s rents from the mainland above Hong Kong’s.

“I was chairman and they just had to go along,” he said
in an interview at his office in the Standard Chartered Building
in Hong Kong.

Chan is spending $5.1 billion to build malls and offices in
five Chinese cities outside Shanghai to tap demand for luxury
goods, a market CLSA Asia-Pacific Markets estimates will be the
world’s biggest in a decade. That’s reduced his reliance on
apartment projects at home and steered him away from residential
developments in China, housing markets with concerns of a bubble.

It’s also pitting Hang Lung’s fortunes against inflation
that threatens to push up construction costs and derail luxury
spending. China’s central bank raised interest rates last week
for the third time since mid-October to cool prices.

He has been “arguably too bullish, though I think he can
continue to deliver,” said Hugh Young, Singapore-based managing
director of Aberdeen Asset Management Asia Ltd., which owns Hang
Lung shares. “He’s successfully engineered a major shift in the
company. We’ve followed the company for 20 years through various
booms and busts and there’s depth and substance to him.”

Hang Lung shares rose 0.8 percent to HK$31.85 at the 4 p.m.
close of trading in Hong Kong today. They have declined 12
percent this year.

Commercial Landlord

Founded in 1960 by Chan Tseng-hsi and listed on the Hong
Kong stock exchange 12 years later, Hang Lung Group Ltd., the
parent of Hang Lung Properties, became one of the first
developers in the city to invest heavily in commercial
properties. Properties built to lease accounted for 83 percent
of total assets at the end of June 2010, according to the
company’s annual report.

Its focus on becoming a commercial landlord has helped the
company avoid going head-to-head with larger, residential-focused competitors on the mainland, such as China Vanke Co.
Hang Lung is Hong Kong’s third-biggest developer by market value.

“I’m too short and when I bump into big guys I let them go
first and try to find other ways,” said Chan, 61, who stands at
about 1.6 meters (5.2 feet). China’s residential property “is a
big market, but also one that has so many mega-domestic players
with their own vast and extensive systems in place. How can we
compete with them?”

Vanke, China’s biggest developer by market value, last year
made 48 billion yuan ($7.3 billion) in revenue from residential
sales, while China Overseas Land Ltd., a mainland-based
developer listed in Hong Kong, took in HK$36 billion ($4.6
billion), more than any other Hong Kong-based builder.

Ninefold Increase

Hang Lung shares have risen more than ninefold since Chan
took over in 1991, while its assets have grown about 8 times.
The company is the third-best performer among Hong Kong’s major
developers since Chan became chairman, trailing only Sun Hung
Kai Properties Ltd. and billionaire Li Ka-shing’s Cheung Kong
Holdings Ltd., the city’s two biggest builders, over the period.

Hang Lung, which means “eternal prosperity” in Chinese,
completed Grand Gateway in Shanghai in 1999 and last year opened
the Palace 66 in the northeastern Chinese city of Shenyang, its
first mall outside of Shanghai. Over the next five years, it
plans to add at least 1.5 million square feet of mall or office
space a year in cities including Jinan, Wuxi, Dalian and Tianjin.

The average rental at major shopping malls in Shanghai at
the end of last year was 46.7 yuan per square meter per day, an
87 percent increase from the same period in 2005, according to
Seattle-based property broker Colliers International.

‘New Challenges’

The management of those malls may prove challenging, Morgan
Stanley analysts led by Coral Ching wrote in a Jan. 27 report.

The company “lacks a proven track record in running a
large property portfolio in China,” the analysts wrote. The
new malls over the next three to five years will pose “new
challenges for Hang Lung at operation level.”

The group’s rental income from Shanghai, where it now
operates two mall-and-office complexes, has increased more than
threefold since 2005. The opening in August of the Jinan
shopping mall will probably help Hang Lung’s rental income from
the mainland surpass Hong Kong’s for the first time, Chan said.

Hang Lung’s rental revenue from Hong Kong was HK$2.61
billion in the 12 months ended June last year, compared with
HK$1.93 billion from the developer’s mainland China properties.

Luxury Demand

“Their business model is simple: focusing on the retail
segment and riding on mainland China’s burgeoning consumption
demand,” said Lee Wee Liat, a Hong Kong-based analyst at
Samsung Securities Ltd. “It’s hard not to fall in love with a
company whose management and local staff have such a clear
conviction and passion on the things they do.”

Samsung Securities has the highest 12-month price target,
at HK$49.30, among 22 analysts that track the company, according
to data compiled by Bloomberg.

Demand for luxury goods and travel from Greater China will
account for 44 percent of the global total by 2020, up from the
current 15 percent, as its “burgeoning middle class is adopting
previously unattainable high-end lifestyles,” CLSA’s Hong Kong-based analyst Aaron Fischer said in a report on Feb. 2.

‘Never Again’

Hang Lung’s decision to avoid residential real estate in
the world’s most populous nation as housing prices surged may be
paying off. With China’s government trying to cool home prices
that climbed for a 19th month in December, analysts including
Hong-based Eva Lee at Macquarie Securities Ltd. prefer Hang Lung
for its relative immunity to potential house price declines.

China has approved property tax trials in Shanghai and the
western city of Chongqing and raised the minimum down payment
for second-home purchases.

“We tried one small apartment project and after that I
said never again,” Chan said. “The taxes are high and mainland
officials are mindful about residential prices because it
impacts ordinary people’s livelihood. But would they care about
how much I’m charging international banks and high-end fashion
brands?”

Investors are betting the answer is no: Hang Lung’s shares
have gained as much as 200 percent from the trough during the
global credit crisis. They are trading at about 16 times 2010
earnings, the highest among Hong Kong’s 20 biggest developers,
and 1.5 times book value, the third highest, according to data
compiled by Bloomberg.

Unsold Apartments

Hang Lung is seeking to buy more sites in China, Chan said,
declining to give details. The company in November raised
HK$10.9 billion selling shares, bringing its cash and near cash
to HK$24.6 billion, according to the earnings on Jan. 26.

The company has about 1,500 unsold apartments in Hong Kong
with an estimated value of about HK$20 billion, according to
Samsung Securities’ Lee. Chan said Hang Lung will gradually
offload the apartments in stock to fund its mainland expansion.

“We expect to see them start to sell more properties in
2011 and early 2012 to lock in the very high margins on their
apartments and recycle capital into their mainland
developments,” said Andrew Lawrence, a Hong Kong-based analyst
at Barclays Capital.

Chan, who has an MBA from the University of Southern
California, lived in the U.S. for a decade and running the
family’s business in California when his father died in 1986. He
took over from his uncle, who held the chairmanship on an
interim basis after the elder Chan’s death.

‘Big Picture’

“When I first took over, our management looked at trivial
items like how much a chair or a pen cost, but rarely at the big
picture,” said Chan, a former director of Enron Corp. “They
didn’t even want to go out and meet investors. So when I said we
had to go into mainland China, many of them, of course, were
apprehensive.”

Today, his transformation of the company is nearly complete:
Hang Lung hasn’t bought any land in Hong Kong for at least 10
years. Hong Kong’s home prices have gained more than 55 percent
over the past two years, prompting the government to impose
measures to curb the surge.

“I won’t say we’re through with Hong Kong cause you can
never say never,” said Chan. “But why would we invest here if
our projects in mainland China are giving us nearly 30 percent
unleveraged return? For me to start buying in Hong Kong again,
things will have to get pretty ugly. I’m not sure I want to see
that happening.”